The Gap Between the Best and Worst Hedge Funds Just Got Wider

The dispersion of HFR’s hedge funds increased by 6.2 percentage points in September.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

Hedge fund performance dispersion widened last month.

According to recent Hedge Fund Research data, returns for the top hedge funds in September far exceeded those at the bottom. The top decile of hedge funds in HFR’s HFRI 500 index gained an average of 6.4 percent last month, while the bottom decile of funds fell 14.3 percent.

The top/bottom dispersion of HFRI’s hedge funds reached 20.7 percent in September, a 6.2 percentage point jump from August’s rate.

“The story has accelerated, but it hasn’t really changed,” Kenneth Heinz, president of HFR, told Institutional Investor. According to Heinz, September’s numbers were a continuation of the last part of August, when the top areas of performance included strategies with minimal exposure to declining public equities.

These strategies included macro hedge funds. In September, the HFRI 500 Macro index jumped 2.75 percent, reaching a year-to-date performance gain of 17.45 percent. Other top performers included hedge funds with trend-following CTA strategies and currency-focused exposures. For example, the HFRI Macro: Currency Index grew 2.3 percent in September.

These top-decile funds shared one common factor: their ability to diversify away from failing parts of the market. In September, mounting inflation, rising interest rates in the U.S., and continued geopolitical instability created a challenging environment for investors. Strategies with the most beta locked into the S&P 500 found themselves at the bottom of the performance list. The HFRI Relative Value (Total) Index declined 1.4 percent in September; the HFRI RV: Yield Alternative Index fell 8.6 percent; and the event-driven index declined 4 percent.

At the same time, larger hedge funds saw much higher performance compared to both smaller funds and average hedge fund performance. HFRI’s Asset Weighted Index, which weights hedge funds based on their size, grew 1.1 percent in September, while its composite index fell 2.3 percent.

“It seems that [larger funds] have done a good job of preserving capital,” Heinz said.